Mr Mackey said the regulator had tried to intervene on the issue but “hadn’t managed to sort it out properly”.

He said: “It’s absolute madness. You can understand a view for a short period where people are saying ‘oh well they’ve got into trouble, they should be penalised for it’. But when you are talking about the sums involved and the complexity in the system, it’s just stupid.

“It’s actually all just washed out within the [DH] group. I don’t believe any board would be looking at that and saying, ‘we’ve got to pay the wages next month but it’s going to cost us 6 per cent, should we say no?’

“It’s not changing any behaviour. It’s totally pointless.”

Dozens of hospital providers with budget deficits rely on cash support from the DH to maintain payments to staff and suppliers. Previously it was given as public dividend capital with no expectation of repayment, but in 2014-15 the DH started only offering repayable loans.

Asked if the debts would need to be written off, Mr Mackey said: “We’re going to have to rebase the balance sheet at some point, when we’ve got a sustainable plan. But again, when you say that, there will be people out there who will say: ‘How do I game that? How do I get ahead of that and get most advantage out of that?’”

Asked if he was concerned about this, Mr Mackey said:“Absolutely. It’s outrageous. If you look at it objectively, you’ve got providers who can’t pay suppliers, which might potentially put a supplier out of business, because a lot of providers do try and use local firms where they can.”

Asked if the DH was to blame for introducing stricter rules around cash support, he said: “You can sort of see why they think it might be the right thing to do because they think it would change behaviour… It doesn’t change behaviour. The thing that will change behaviour is when people think they have got a sustainable plan and most people can deliver it.”

He said cash flow problems had also arisen from delayed payments to trusts from the sustainability and transformation fund, which is controlled by the Treasury, as well as a “ridiculous amount of stupid contractual challenge effort going on” with some commissioners “holding some money back for an argument”.

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